Question
On January 1, 2019, Pitt Company sold a patent to Chatham Inc. which had a carrying value on Pitt's books of $10,000. Chatham gave Pitt
On January 1, 2019, Pitt Company sold a patent to Chatham Inc. which had a carrying value on Pitt's books of $10,000. Chatham gave Pitt a $60,000, non-interest-bearing note payable in five equal annual installments of $12,000 with the first payment due and paid on January 1, 2020. There was no established price for the patent, and the note has no ready market value. The prevailing rate of interest for a note of this type at January 1, 2019, is 12%.
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Required:
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1. Prepare a schedule showing the income or loss before income taxes that Pitt should record for the years ended December 31, 2019 and 2020. If required, round your answers to the nearest cent.
2019 | 2020 | ||
Gain on sale:Loss on sale:Gain on sale: | |||
CashNotes ReceivablePatent carrying valuePatent fair value Jan 1, 2019Sales price | $- fill in the blank- | ||
Carrying value of patentGain on sale of patentInterest expenseInterest incomePayment made on January 1, 2020 | - fill in the blank- | $fill in the blank | |
Interest expenseInterest incomeInterest payableInterest receivableNotes payableInterest income | fill in the blank | fill in the blank | |
Income before income taxes | $fill in the blank 7dac7bfb505f061_10 | $fill in the blank 7dac7bfb505f061_11 |
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2. If Pitt inadvertently failed to discount the note and instead recorded it at its gross value, what would be the effect on income or loss before income taxes for the year ended December 31, 2019? If required, round your answer to two decimal places.
Income before income taxes would be
overstatedunderstatedthe sameoverstated
by $fill in the blank 1220edfa8f8c02a_2 for 2019.
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